The Apple iPhone Success Story: Planned Obsolescence, Disruptive Innovation or Something Else?

Apple has become the world’s largest company in terms of market capitalization (the product of price per share times the number of common stock shares outstanding), Apple’s earning statement in early August 2017, exceeded estimates of the Wall Street professionals.

Apple’s financial power continues to grow, set records and exceed expectations. Apple’s recently released 3^rd quarter 2017 earnings show $8.7 billion in profits in just a single quarter from revenues of $45.4 billion. Apple’s stock quickly jumped 6% the day after earnings were released.

The undisputed star of the Apple portfolio is the iPhone.

Not terribly long ago, it was Microsoft that had star billing. In 1999, Microsoft was breaking the records.  Its market capitulation was $620 billion while Apple was “teetering on bankruptcy,” James B. Stewart’s New York Times piece.  Moreover, Microsoft was so dominant in the personal computer business the “government deemed the company an unlawful monopoly,” according to Stewart.

Two growth strategies are often mentioned to account for Apple’s success.

The continual introductions and roll-outs of iPhones suggest “planned obsolescence.” This strategy was the key behind Alfred Sloan’s General Motors strategy where a new annual car model essentially made the older models obsolete. Textbook authors are beneficiaries of planned obsolescence by coming out every two years with a “new” edition.

The other strategy associated with the iPhone is “disruptive innovation.” As coined by Harvard Business School’s Clayton Christensen, disruptive innovation “enables new entrants to provide goods and services that are less expensive and more accessible, an eventually replace – or ‘disrupt’ – ell-established competitors.”

Christensen does not consider the iPhone to represent disruptive innovation. As quoted in Disruptive Genius he said, “In smartphones, Nokia and RIM [which makes BlackBerrys] were the dominant companies. They had closed, proprietary architectures. Apple came in later than RIM and came in with a better product, the iPhone. The theory said Nokia and RIM should have killed them: you disrupt with a cheaper, simpler product, not a more expensive, better one.”

Christensen added that at first he didn’t believe the iPhone would succeed but admitted he was wrong. “Two things happened that I didn’t see at the beginning. One, the iPhone was a closed, proprietary system on the inside, but to the outside world, it was open to lots of apps that you could plug into it. Nokia and RIM were closed to the outside—you couldn’t stick in apps. They fell off the cliff, and Apple had the field almost to itself.”

As for “planned obsolescence,” one could argue that the frequent iPhone upgrades serve to make its previous versions obsolete.  Catherine Rampell, in an article, “Cracking the Apple Trap,” discusses the planned obsolescence strategy in the Oct. 29, 2013, issue of The New York Times Magazine:

“When Apple started making the iPhone in 2007, its product was so innovative that it could have deliberately degraded durability without fear. But in the last couple years, the company has faced stiffer competition from Samsung and HTC, among others, which should de-incentivize planned obsolescence. ‘Buyers are smart, and if they start figuring out that one of the costs of buying Apple’s products is that they’re constantly nickel-and-diming you, they’ll switch,” said Austan Goolsbee, an economics professor at the University of Chicago’s Booth School of Business.”

Another argument against the planned obsolescence argument is that Apple is not so much trying to convert its existing users to the newer models, but that its innovation is superior to the competion and users of other products should switch to the iPhone.

Perhaps a more apt description of the Apple strategy is “sustaining innovation,” as described by Adam Hartung in his March 31, 2016, article in Forbes, “Apple: Better, Faster, Cheaper Is Not Disruptive Innovation – But Is That OK?:”

“It was about ‘more, better, faster, cheaper’ in Apple’s ongoing effort to defend and extend its leadership position in several categories. To keep winning Apple needs to make sure developers know that its products will continue to sell, and sell.” Hartung added Apple was showing app. developers it intends to expand sales the old-fashioned way, by winning more in the trenches against competitors that may not have the cache or features, but have a lower price. He writes, “Developers won’t have to go Android to be price competitive.  And one would hope that the re-engineering in these products will allow Apple to maintain those fantastic profit margins, even at these lower prices.”